A homeowner insures a flat for a figure that felt sensible. There is a fire, the damage is assessed, and the payment comes to a fraction of the loss. Nothing has gone wrong procedurally — this is underinsurance, and it is written into the contract.
How the rule works
If the sum insured is below the true value, the claim is reduced by the same proportion. Insure a property worth 4 million for 2 million, and a 200,000 claim pays 100,000. The rule applies to every claim, not just total losses.
| True value | Sum insured | Loss | Paid |
|---|---|---|---|
| 4,000,000 | 4,000,000 | 200,000 | 200,000 |
| 4,000,000 | 2,000,000 | 200,000 | 100,000 |
| 4,000,000 | 1,000,000 | 200,000 | 50,000 |
Why the number ends up wrong
- Using the purchase price instead of the cost to rebuild — these are not the same thing.
- Setting a figure once and never revisiting it while construction costs rise.
- Guessing at contents rather than adding up what replacing them would actually cost.
- Choosing a lower sum insured deliberately to reduce the premium.
For buildings, work from current construction cost per square metre — not the market price of the property, which includes the land and the location. For contents, price the replacement rather than the memory.
The fix is cheap
Correcting a sum insured mid-term is an endorsement and costs the difference in premium. Discovering the problem at claim time costs considerably more.